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Business Organisation UNIT 4
Principles Of Business
Chhatrapati Shahu Ji Maharaj University
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BUSINESS ORGANISATION UNIT 4
Meaning, Causes Business combinations are combinations formed by two or more business units, with a view to achieving certain common objective (specially elimination of competition); such combinations ranging from loosest combination through associations to fastest combinations through complete consolidations. L. Haney defines a combination as follows: “To combine is simply to become one of the parts of a whole; and a combination is merely a union of persons, to make a whole or group for the prosecution of some common purposes.” Causes of Business Combinations:
- Elimination of Cutthroat Competition Large-scale production and intense competition have become the rule of the present day economy. Cutthroat competition leads to wasteful advertising, unnecessary duplication, over production etc., which all ultimately result in lowering the profit margin of the industrialists. Under such circumstances, small units could not survive. Therefore, the only alternative available to the industrialists is the elimination of competition, which could be possible only through business combination.
- Economies of Large-scale Production Large-sale production has certain definite advantages. If different firms come together and form amalgamations, the scale of operation also become larger and savings in overhead charges can be effected.
- Influence of Tariff The tariff policies of different countries have also furthered the causes of the combination movement. Tariff is often described as the “Mother of Combination“. By imposing high tariff on imported goods, the Governments throughout the world offered protection to home industries. The protection offered by the state resulted in the establishment of a number of business units. Consequently, competition amongst them became tense and the need for business combination was felt.
- Transport Revolution Another contributory cause for the combination movement was the revolution in transport and development of communications. The development of transport facilities accelerated the growth of large-scale undertakings. The large undertakings began to absorb smaller units to cater to the needs of the local market. Organizational Revolution The growth of joint stock companies has also facilitated combinations. Basically the company form of organization itself is a type of combination. Large companies with huge capital were able to control comparatively small companies by subscribing to their shares. Hence, holding companies came into being.
- Control of the Market Another important cause for the rise of the combination movement was the desire to control the market by regulating the output. This goal could be achieved only through business combination.
- Trade Cycles The tendency of business activities to fluctuate regularly between booms and depressions gave
a fillip to business combinations. Particularly during the periods of depression, new units cannot enter into the industry and even the existing small and inefficient units cannot survive. During 1930, when the Great Depression occurred, the situation became very awkward and the industrialists began to adopt the technique of business combination. 8. Technological Factors The technological development also paved way for large-scale operations. Small units with limited financial resources were found unable to compete with bigger ones. Hence, they realized the need for business combination. Moreover, the adoption of modern techniques required huge capital investments, which small units could not provide. Therefore, they were forced to combine themselves to get the benefits of modernization. 9. Patent Laws Business Combination has also been fostered by patent laws. The inventors were given exclusive right of the use of their inventions. This statutory right also furthered the combination movement. 10. Individual Ability Men of technical skill of a superior order are less in number. The scarcity of business talent is also a cause for the centralization of powers in the hands of a few. Many combines have common directors, managers, which in effect would mean their common control. 11. Policies of the Government The labour, fiscal, industrial and taxation policies of the Governments also influenced the formation of business combinations. The Government may even exert pressure on weaker units to merge with bigger ones changes in the policies of the Government also increased the uncertainty among the businessmen. The instability of the economic policies also encouraged the growth of the combination movement. 12. Rationalization In fact, combination is the first step towards rationalization. The growth of rationalization movement encouraged the emergence of business combinations to a great extent. 13. Cut of the Colossal The mid-nineteenth century brought in its wake the cult of the colossal-respect for bigness. People began to respect big things and there was a corresponding contempt for small things. The impact of this tendency was felt in the business field also. The glamour for giant undertakings captured the minds of the industrialists. This tendency also furthered the combination movement. Business Combination: Objectives The basic objective of combinations is the sustained profitable growth of the combining enterprises. This basic objective is realized by achieving economies of scale, reducing competition, preventing the entry of new firms and controlling the market. The objectives of combinations are:
- Achieving sustained growth and profits.
- Reduction in competition.
- Preventing the entry of new firms by creating entry barriers.
- Achieving monopoly status.
- Undertaking large scale production and benefiting from economies of scale.
- Investing in common facilities and infrastructure.
Forms of Business Combinations: By the phrase ‘forms of combinations’, we mean the degree of combination, among the combining business units. According to Haney, combinations may take the following forms, depending on the degree or fusion among combining firms: (I) Associations: (i) Trade associations (ii) Chambers of commerce (iii) Informal agreements (II) Federations: (i) Pools (ii) Cartels (III) Consolidations – Partial and Complete: (а) Partial Consolidations: (i) Combination trusts(ii) Community of interest (iii) Holding company (b) Complete Consolidations: (i) Merger (ii) Amalgamation The following chart depicts the above forms of business combinations: (I) Associations: Forms of Combinations, in this Category are: (i) Trade Associations: A trade association comes into being when business units engaged in a particular trade or industry or in closely related trades come together for the promotion of their economic and business interests. Such an association is organized on a non-profit basis and its meetings are used largely for a discussion of matters affecting the common interests of members such as problems of raw- materials, labour, tax-laws etc. ii) Chambers of Commerce:Chambers of commerce is voluntary associations of persons connected with commerce and industry. Their membership consists of merchants, brokers, bankers, industrialists, financiers etc. Chambers of commerce is formed in the same way as associations, with the ultimate objective of promoting and protecting the interests of business community. But they differ from trade associations in that they do not confine their interests only to a particular trade or industry; but stand for the business community in a particular region, country, or even the world, as a whole. (iii) Informal Agreements: Informal agreements among business magnates are often concluded secretly at social functions like dinners or at meetings of trade associations etc. These agreements are merely understanding among the parties and no written documents are prepared. As they depend mainly on the honour and sincerity of members; they are referred to as Gentlemen’s agreements. (II) Federations: Forms of Business Combinations in this Category are: (i) Pools: Under the pool form of business combination, the members of a pooling agreement join
together to regulate the demand or supply of a product without surrendering their separate entities, in order to control price. (ii) Cartels (Kartells): Basically cartel is the European name for the American pools. According to Von Beckereth, “A cartel is a voluntary agreement of capitalistic enterprises of the same branch for a regulation of the sales market with a view to improving the profitableness of its members’ business.” Mergers A merger is the combination of two companies into one by either closing the old entities into one new entity or by one company absorbing the other. In other words, two or more companies are consolidated into one company. A merger is a combination of two corporations, as a result of which one loses its corporate entity. The surviving corporation acquires the liabilities, assets, personnel and much of the reputation of the fusing company. A merger is fundamentally different from a statutory consolidation in the sense that it involves a combination of two companies, whereby an entirely new corporation is formed. Both the old companies cease to exist, and the share of their common stock are exchanged for shares in the new company of Mergers Acquisition of Modern Foods, Kissan, Tata Oil Mills Co., Ltd (TOMCO), Kwality Walls etc., by Hindustan Level Limited(HLL). Acquisition of ANZ Grindlays Indian operations by Standard Chartered, Times Bank by HDFC Bank, Bank of Madura by ICICI Bank, Acquisition of Voltas and Allwyn by Electrolux. Subsequently Electrolux’s – Indian operations were acquired by Videocon International. Recent international mergers include – acquisition of Gillette by P&G, Betapharma by Ranbaxy, IBM’s PC division by Lenovo, Compaq by Hewlett Packard(HP) etc.
Types of mergers
The following are the types of mergers . Horizontal mergers: It refers to two firms operating in same industry or producing ideal products combining together. For e., in the banking industry in India, acquisition of Times Bank by HDFC Bank, Bank of Madura by ICICI Bank, Nedungadi Bank by Punjab National Bank etc. in consumer electronics, acquisition of Electrolux’s Indian operations by Videocon International Ltd., in BPO sector, acquisition of Daksh by IBM, Spectramind by Wipro etc. The main objectives of horizontal mergers are to benefit from economies of scale, reduce competition, achieve monopoly status and control the market. 2. Vertical merger: A vertical merger can happen in two ways. One is when a firm acquires another firm which produces raw materials used by it. For e., a tyre manufacturer acquires a rubber manufacturer, a car manufacturer acquires a steel company, a textile company acquires a cotton yarn manufacturer etc. Another form of vertical merger happens when a firm acquires another firm which would help it get closer to the customer. For e., a consumer durable manufacturer acquiring a consumer durable dealer, an FMCG company acquiring m advertising company or a retailing outlet etc. 3. Conglomerate merger: It refers to the combination of two firms operating in industries unrelated to each other. In this case, the business of the target company is entirely different from those of the acquiring company. For e., a watch manufacturer acquiring a cement manufacturer, a steel manufacturer acquiring a software company etc. The main objective of a
Loss of key personnel & customers post acquisition Competitors take the opportunity to gain market share whilst the takeover target is being integrated. The common drawbacks of takeovers include: High cost involved – with the takeover price often proving too high Problems of valuation (see the price too high, above) Upset customers and suppliers, usually as a result of the disruption involved Problems of integration (change management), including resistance from employees Incompatibility of management styles, structures and culture Questionable motives Types of Takeovers Reverse Takeover- Reverse takeovers or Bail Out takeover is a type of acquisition that helps the managers of private companies to attain a public company status without resorting to an (IPO) Initial Public Offering. Friendly Takeover- Under this type of takeover, the acquirer company notifies its Board of Directors about the acquisition offer before making a direct offer to the target company. Thereon, the acquired company take the consent of the Directors & shareholders of the target company to have a friendly takeover. Hostile Takeover- A hostile takeover is a forced method of acquiring the target company. In such an acquisition, the management of the target company does not agree for the merger or is reluctant to for takeover. A takeover is referred to as hostile, if the board of the target company rejects the acquisition offer, but the acquirer continues to pursue it. Key difference between Takeover and Merger Sr. No Terms of Differences Takeover Merger 1 Number of Entities Involved Minimum 2 companies are required in which one company takes over the shares or assets of the other company. Minimum 2 companies are required for a merger wherein two companies merge together as one. 2 Size of the Companies Different sizes of companies are involved where the larger company Both companies are equal in size. takeovers smaller companies. 3 Transfer of
Shares The acquirer company purchases or takeover more than 50% shares of the target company. Shares of the absorbing company are given to the shareholder of the absorbed company. 4 Terms Company takeover can be friendly or hostile. A merger is usually voluntarily or friendly. 5 Consolidation Takeover is driven by the acquirer company with or without the consent of the acquired company. Merger is often driven by the absorbing company. 6 Accounting Treatment The acquirer company takes over all the assets and liabilities of the target company. The assets and liabilities of both the companies are merged and consolidated Acquisitions An acquisition is defined as a corporate transaction where one company purchases a portion or all of another company’s shares or assets. Acquisitions are typically made in order to take control and build on the target company’s weaknesses or strengths and capture synergies. There are several types of business combinations: acquisitions (both companies survive), mergers (one company survives), and amalgamations (neither company survives). The acquiring company will buy the shares of the assets of the target company, which gives the acquiring company the powers to make decisions concerning the acquired assets without needing the approval of shareholders from the target company. Benefits of Acquisitions
- Reduced entry barriers With M&A, a company is able to enter into new markets and product lines instantaneously with a brand that is already recognized, with a good reputation and an existing client base. An acquisition can help to overcome market entry barriers that were previously challenging and also reduce the risks of adverse reactions by competitors. Market entry can be a costly scheme for small businesses due to expenses in market research, development of a new product, and the time needed to build a substantial client base.
- Market power An acquisition will help to increase the market share of your company quickly and reduce the competition’s stronghold. Even though competition can be challenging, growth through
Following an acquisition, the capacity of the suppliers of the company may not be enough to provide the additional services, supplies, or materials that will be needed. This may cripple the operations of the acquisition. 6. Brand damage M&A may hurt the image of the new company or damage the existing brand. An evaluation on whether the two different brands should be kept separate must be done before the deal is made. Merger vs. Acquisition – Comparative Table Basis for comparison Merger Acquisition Definition The merger is a process in which more than one companies come forward to work as one. The acquisition is a process in which one company takes control of another company. Terms Considered to be friendly and planned. Considered to be hostile and sometimes involuntary (not always) Title A new name is given. The acquired company comes under the name of the acquiring company Two or more companies that consider each other on equal terms usually merge. Acquiring a company is always larger than the acquired company. Power The power-difference is almost nil between the two companies. The acquiring company gets to dictate terms. Stocks Merger leads to new stocks being issued. In an acquisition, there are no new stocks issued. Example
Merging of Glaxo Wellcome and SmithKline Beecham to GlaxoSmithKline Tata Motors acquisition of Jaguar Land Rover CONCLUSION A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals." A takeover, or acquisition, is usually the purchase of a smaller company by a larger one
Business Organisation UNIT 4
Course: Principles Of Business
University: Chhatrapati Shahu Ji Maharaj University
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